Economists stumped by strong state economy, weak state revenues

A month into fiscal 2017, some economists are keeping an eye out for signs of a funding crisis like the one that hit Massachusetts this past spring.

“We will monitor to see if some sort of trend is developing,” said Andy Bagley, vice president of policy and research for the nonprofit Massachusetts Taxpayers Foundation.

In the last quarter of fiscal 2016, which ended June 30, state revenues fell drastically short of projected levels, leaving Massachusetts with a $300 million gap in last year’s budget and a hole in the fiscal 2017 budget, estimated to be approximately $240 million after spending cuts, vetoes and overrides. Fiscal 2017 revenue forecasts were lowered by $750 million.

So far, revenues in the young fiscal year appear to be on track, with July tax receipts coming in at $7 million above predicted levels, according to information the Department of Revenue released Aug. 3.

“In every forecast, models are obviously tied to what’s occurred in the past,” Bagley said. “The question we all have to ask is, was the fourth quarter an anomaly of certain events that just happened to occur?”

Noah Berger, executive director of the nonprofit Massachusetts Budget and Policy Center, points to volatility in the stock market as a likely culprit.

“In FY ‘16, we saw the effects of overly optimistic revenue projections that didn’t account properly for the declines in the stock market in the prior year,” he said. “I think, going forward, the new revenue estimates look reasonable.”

The Baker administration filed a supplemental budget to address fiscal 2016 budget gaps, while lowered revenue projections for the current fiscal year were incorporated into the fiscal 2017 budget.

“The closing months of Fiscal Year 2016 were an important reminder that when we control our spending it allows us to adjust for unexpected changes,” Secretary of Administration and Finance Kristen Lepore said in a statement after Gov. Charlie Baker signed the 2017 budget. “The work we have done with the Legislature to align spending with revenue during the past two years while maintaining critical support for key priorities will continue to serve us well in the coming year.”

Some economists continue to voice concerns.

“The larger problem with the current budget is it relies significantly on temporary solutions, and there are a number of accounts that are underfunded that will likely have to receive funds during the year,” Berger said.

Since the financial crisis of 2007-08, which impacted state revenues in fiscal 2009 and spilled into 2010, revenue projections were on target every year until fiscal 2016, Bagley recalled. That, he said, makes fiscal 2016 even more puzzling.

“This was the first time I’ve seen the forecast fall below the benchmark in a recovery,” Bagley said. “What’s a little disconcerting is this is going on in the middle of a recovery.”

Last fiscal year started off well, as revenues came in above benchmark levels for the first nine months. But in the last quarter of the fiscal year, sales tax and corporate tax payments fell well short of projected levels.

Additionally, Berger points to decade-and-a-half-old tax cuts as another contributing factor to the state’s budget issues. In the past 15 years, every governor has entered office and left office with the state facing budget shortfalls, he said.

“Since then, we’ve had ongoing budget problems and made deep cuts to education, local aid, higher education and other areas,” Berger said. “I think the deep tax cuts are the biggest factor. Massachusetts, like other states, also faced growing healthcare costs, and that puts pressure on the budget as well.”

Gerry Tuoti is the Regional Newsbank Editor for Wicked Local. Email him at gtuoti@wickedlocal.com or call him at 508-967-3137.